Considered
and decided by Lansing, Presiding Judge; Hudson, Judge; and Dietzen, Judge.

U N P U B L I S H E D O P I N I O N

HUDSON, Judge

On
appeal from summary judgment in an action by minority shareholders in a close
corporation, appellants argue that the district court: (1) abused its
discretion in determining that appellant’s motion to amend their complaint to
add additional parties was procedurally barred; (2) erred in determining that
appellants’ proposed new claims would not survive summary judgment; and (3) erred
in concluding that Delaware law does not impose a fiduciary duty on a close
corporation to act in the shareholders’ best interests. Because appellants failed to demonstrate good
cause to amend the district court’s scheduling order and because the district
court did not err in its interpretation of Delaware law, we affirm.

FACTS

In
1997, Gerald Timm founded Timm Research Company (Timm Research) to develop a
urinary-incontinence product. Despite
the revenue generated by Timm Research’s other products, by the spring of 1998,
the company required additional operating capital. To raise the needed capital, Timm Research
offered shares of common stock to 15 private placement investors. In April 1998, appellants purchased 35,000
shares of the common stock offered in the private placement for a total
investment of $105,000.

In
the fall of 1998, Timm Research exhausted the capital raised through the
private placement offering and contacted institutional investors to secure
additional funding. Heath Care Capital
Partners (HCCP) was willing to invest in order to facilitate Timm Research’s
acquisition of a product line from a company called Imagyn Technologies subject
to certain conditions: (a) Timm Research would merge with Timm Medical
Technologies, Inc. (Timm Medical), a Delaware corporation; (b) HCCP would
receive a new series of preferred stock; and (c) HCCP would appoint additional
members of Timm Medical’s board. Timm
Research merged with Timm Medical and issued a new preferred series of stock,
“Series A,” which contained a liquidation preference and preemptive rights.

The
acquisition of the Imagyn product lines failed to generate the revenue
anticipated, and Timm Medical continued to need capital. In 1999 and 2000, the board of directors
approved the issuance of two additional series of preferred stock, “Series B,” and
“Series B-1,” which also had liquidation preferences. Timm Medical sold shares of Series B and
Series B-1 as a package in conjunction with two warrants for the purchase of
common stock. Common stock shareholders
were not given notice of the issuance of the preferred shares or the
opportunity to invest.

In
the summer of 2001, Timm Medical’s need for capital became critical. If the company could not secure additional
investment, it would have to declare bankruptcy or otherwise liquidate itself. HCCP, which had undergone a name change to
Ferrar, Freeman and Thompson (FFT), indicated a willingness to advance Timm
Medical $750,000 in order to sustain the company for a short time, giving it
time to locate another investor. FFT
conditioned its investment on the simplification of the capital structure.

The
Timm Medical board adopted a “Plan of Recapitalization” (plan) on October 1,
2001. The plan consolidated all of the
investment represented by the Series B and Series B-1 shares, including the
purchase price of the shares, all the accrued dividends, the warrants, and all
of FFT’s bridge loans and converted this value into a new preferred stock,
“Series B,” which had a liquidation preference and a conversion right to common
stock. The plan also included a reverse
4-to-1 stock split in common stock, to increase the price of the post-split
shares and make the company more attractive to potential investors. The plan was approved between October 1 and
5, 2002, by the written consents of the holders of a majority of shares of each
class of the company’s stock.
Appellants, together with other minority shareholders whose written
consents were not obtained prior to the approval of the plan, were informed of
the recapitalization by letter dated December 17, 2001.

After
Timm Medical implemented the plan in October 2001, Endocare, Inc. (Endocare)
approached the company about a possible acquisition for approximately $36
million, paid in a combination of cash and Endocare stock. Timm Medical’s board negotiated the merger,
which was later approved by the holders of over 90% of each of the classes of
stock. The board allocated the merger proceeds
based on the legal rights possessed by each class of stock. Appellants were entitled to receive
$24,183.78 as compensation for their shares of Timm Medical common stock.

Appellants
commenced suit in July 2002, seeking a declaratory judgment that the reverse
stock split was void due to lack of prior notice to the shareholders. Following a successful appeal to this court,
in January 2004, appellants filed an amended complaint, adding a second count
alleging that respondent, through its board of directors and principals,
breached its fiduciary duty of due care, loyalty, and good faith owed to
appellants by reducing their investment without notice and not treating them
openly, honestly, or fairly. The
district court reopened discovery and established formal deadlines for
nondispositive motions, including motions to join additional parties and
motions to amend the pleadings. The
district court’s scheduling order of February 12, 2004, set the deadline for nondispositive
motions as August 13, 2004.

Respondent
filed a motion for summary judgment on November 17, 2004, seeking dismissal of both counts of the
amended complaint. On November 19, 2004,
appellants filed a motion to amend their complaint again and add the individual
members of respondent’s board of directors as parties as well as a count
alleging fraud. On February 9,
2005, the district court issued an order granting respondent’s motion for
summary judgment and denying appellants’ motion to amend their complaint. The court administrator entered judgment that
same day. This appeal follows.

D E C I
S I O N

I

Appellants
challenge the district court’s decision denying them leave to amend their
complaint to add the individual directors as party defendants, arguing that
their motion to amend was not procedurally barred. The decision whether to permit a party to
amend the pleadings rests within the discretion of the district court and will
not be reversed absent a clear abuse of that discretion. Warrick
v. Giron, 290 N.W.2d 166, 169 (Minn.
1980). A district court’s decision to
modify a pretrial order is also reviewed under the abuse-of-discretion
standard. See Cotroneo v. Pilney, 343 N.W.2d 645, 648 (Minn. 1984).

The district court determined that
appellants’ November 2004 motion to amend—which was filed months after the
deadline for amending pleadings, at the close of discovery, and after
respondent’s motion for summary judgment on the then operative pleading—was
untimely. In addition, the district
court found that permitting appellants’ motion to amend would result in
significant delay, prejudicing both respondent and the unserved potential
individual defendants, who had no in-depth knowledge of the pending
litigation.

Appellants argue that the district
court’s decision to deny leave to amend was governed by Minn. R. Civ. P. 15.01, which provides that
once a responsive pleading is served, the district court shall freely grant
leave to amend a pleading when justice so requires. But appellants moved to amend past the
deadline for nondispositive motions established by the district court’s
scheduling order. Consequently, in
addition to seeking leave to amend, appellants necessarily sought a modification
of the scheduling order. Minn. R. Civ. P. 16.02
states that a scheduling order “shall not be modified except by leave of court
upon a showing of good cause.”

Although
no Minnesota
court has directly addressed the issue, the Eighth Circuit in interpreting Fed.
R. Civ. P. 16(b) has stated that a district court “may properly require that
good cause be shown for leave to file an amended pleading that is substantially
out of time under that [district court’s scheduling] order.” In re
Milk Prods. Antitrust Litig., 195 F.3d 430, 437 (8th Cir. 1999). Accordingly, the issue presented is whether
the district court abused its discretion by finding that appellants failed to
show good cause to modify the scheduling order under Rule 16.02. If good cause is shown, then appellants must
demonstrate that amendment was proper under Rule 15.01. See
Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 608 (9th Cir. 1992)
(noting that a party seeking to amend a pleading after the date specified in
the scheduling order must first demonstrate good cause under Fed. R. Civ. P.
16(b) and then demonstrate that amendment was proper under Rule 15(a)).

Appellants
argue that there are several factors relevant to the issue of timeliness and
good cause in this instance, including: (1) the complexity and volume of
discovery, including the production of over 3,000 documents; (2) the production
of significant agreements, such as the “Series B” stock purchase agreement and
the signed stock subscription warrant agreement, after the deadline for
amending the complaint and completing discovery had passed; and (3) the delay
in deposing respondent’s witness. Appellants
contend that these documents were critical in analyzing the terms of the
recapitalization and the specific acts of wrongdoing by the individual
directors.

The district court did not abuse its
discretion in concluding that appellants presented an inadequate showing of
good cause to modify the scheduling order.
As respondent notes, appellants alleged in their January 2004 amended
complaint that respondent as a corporation, but through its individual
directors, breached a fiduciary duty to appellants. Thus, appellants had already concluded that
the individual directors’ conduct was blameworthy, but did not seek to add them
as parties at that time. While the
additional discovery may have been necessary to help appellants piece together
respondent’s “warrant scheme,” appellants have not demonstrated how the receipt
of these documents was necessary to state a claim against the individual
directors. Moreover, the record does not
reflect that appellants moved to compel discovery of these documents despite
knowledge of the district court’s impending deadline for nondispositive
motions.

In
addition, the record reflects clear prejudice to respondent if appellants were
allowed to modify the scheduling order.
The Minnesota Supreme Court has identified several factors to consider
when examining whether modification of a pretrial order is appropriate
including: “(1) the degree of prejudice to the party seeking the modification;
(2) the degree of prejudice to the party opposing the modification; (3) the
impact of a modification at that stage of the litigation; and (4) the degree of
willfulness, bad faith, or inexcusable neglect on the part of the party seeking
modification.” Cotroneo, 343 N.W.2d at 649.

Here,
the record reflects that at least two of the proposed individual defendants had
no knowledge that appellants had commenced suit. Granting leave to amend the scheduling order
would have resulted in considerable delay and expense for respondent because,
at a minimum, each new defendant would require an additional deposition and
discovery. Finally, appellants brought
this motion after respondent’s dispositive motion for summary judgment, and roughly
ten months after filing its January 2004 amended complaint. The motion was untimely. SeeCybyske v. Indep. Sch. Dist. No. 196,
347 N.W.2d 256, 264 (Minn.
1984) (affirming the district court’s denial of leave to amend under Rule 15.01
when the plaintiff “delayed over a year after filing her complaint, until the
eve of the defendants’ summary judgment motion, to make her motion to amend,”
reasoning that the motion was untimely and prejudicial).

The
district court did not abuse its discretion in denying appellants’ leave to
amend their complaint. Because we are
affirming the district court’s order on procedural grounds, we decline to
address the merits of appellants’ claims for breach of fiduciary duty and fraud.

II

Appellants
also challenge the district court’s grant of respondent’s motion for summary
judgment, arguing that the district court erroneously concluded that Delaware law does not
permit shareholders to bring a claim for breach of fiduciary duty against a
close corporate entity,[1]
as opposed to the individual board members.
On appeal from summary judgment, we examine two questions: “whether there are any genuine issues of
material fact and whether the [district] courts erred in their application of
the law.” Cummings v. Koehnen, 568 N.W.2d 418, 420 (Minn. 1997).
We review questions of law de novo.
Christensen v. Eggen, 577
N.W.2d 221, 224 (Minn.
1998).

The
district court concluded Timm Medical, as a corporation, owed no fiduciary duty
to its shareholders and, thus, cannot breach duties of care, loyalty, or good
faith. The district court’s conclusion
is rooted firmly in existing Delaware
law. See
Arnold v. Soc’y
for Sav. Bancorp, Inc., 678 A.2d 533, 539 (Del. 1996) (holding that
corporate entities have no fiduciary duty to shareholders and rejecting
plaintiff’s argument that corporation was vicariously liable for the actions of
its directors under principles of respondeat superior); Alessi v. Beracha, 849 A.2d 939, 950 (Del. Ch. 2004) (stating that
plaintiff shareholder presented no viable legal theory to hold a corporation
liable to remedy the plaintiff’s injuries).

Appellants
argue that this court should create an exception in Delaware law, imposing a fiduciary duty on
close corporations to shareholders because (a) like partnerships, there is
little division between the majority stockholders and the directors and (b)
minority shareholders in close corporations cannot easily liquidate their
investment if dissatisfied with the direction of the corporation. But appellants cite to no Delaware authority
either approving an exception for close corporations or even entertaining the
prospect of any exception to the general rule that corporations do not owe a
fiduciary duty to shareholders. Accordingly,
the district court did not err in refusing to interpret Delaware
law contrary to Delaware
courts.

Affirmed.

[1]A close corporation is “[a] corporation whose stock is
not freely traded and is held by only a few shareholders (often within the same
family).” Black’s Law Dictionary 341 (7th ed. 1999).